Provisionally speaking

Oct. 6, 2016

A conflict over applicable provisions to a subcontract

Highway contracts typically contain several provisions that come into play in various scenarios which entitle the contractor to a change order.

Because the requirements and prerequisites for recovery sometimes vary from provision to provision, arguments occur over which provision applies to a particular event. That was the issue in a recent Minnesota case.

Storms, Inc. v. Mathy Constr. Co., 2016 Westlaw 4379391 (Minn. Aug. 17, 2016) involved a road repair project to portions of Highways 44 and 76 in Houston County for the Minnesota Department of Transportation (MnDOT). The prime, Mathy, subcontracted with Storms for excavation work, which was based upon MnDOT’s estimated quantities in the prime contract.

Soon after construction began, it became apparent to the prime, subcontractor and MnDOT that actual excavation quantities would be significantly less than estimated quantities. MnDOT’s project engineer recalculated the quantities after the subcontractor completed the work and informed the prime that a deductive change order for $327,064.42 would be issued. At a meeting between all parties, MnDOT indicated that it was willing to pay any fixed costs the subcontractor may have incurred as a result of the decreased quantity, but adequate proof of such costs must be provided. The subcontractor never submitted a claim for fixed costs, so MnDOT issued the deductive change. Mathy, in turn, issued a deductive change to Storms, and Storms sued Mathy.

In response to the lawsuit, Mathy filed a motion for summary judgment seeking dismissal of the case and, in support, cited MnDOT Specification 1901, which allows MnDOT to order a change in quantities. Mathy argued because that provision was incorporated into the subcontract, the prime also was permitted to pass along to the subcontractor any such changes. Storms countered with a motion for summary judgment of its own and argued that another MnDOT provision, Specification 1402, which covers alterations in the work, mandates that changes be issued during the course of the work, not afterwards. The trial court sided with Storms and ruled that Mathy did indeed breach the subcontract. The matter proceeded to trial to determine damages.

After trial, however, the trial court reversed itself and held that the provision cited by Storms applied to alterations in the work and not to changes in estimated quantities. It, therefore, ruled that Storms was entitled to its fixed costs. Unfortunately, because Storms introduced no evidence during trial of its fixed costs, the court awarded nothing. Storms then appealed.

The court of appeals essentially reinstated the trial court’s initial ruling that Specification 1402 governed, and since the prime issued the change order after the work was finished it breached the subcontract. It thus remanded the case back to the trial court for a determination of damages. This time, Mathy appealed to the Minnesota Supreme Court.

On final appeal, the Minnesota Supreme Court first determined that Specification 1901 correctly applied because it allowed MnDOT to adjust estimated quantities to reflect either actual quantities performed or an erroneous estimate. The court also observed that there is no time limit stated for such adjustments.

The court then turned to Storms’ argument that Section 1402 applied. That provision states:

[MnDOT] may alter the details of construction as necessary for proper completion of the Project and as desired for reasons of public interest. Alterations may be made at any time during the progress of the work, but will not involve added work beyond the limitations imposed by law, nor beyond the termini of the proposed construction except as may be necessary to satisfactorily complete the Project.

While observing that Section 1402 expressly limited changes due to alterations in the work to “any time during the progress of the work” and not afterwards, the court ruled that the provision had no applicability in this case. It distinguished the two Specification provisions and stated “[h]ere, the scope of the work was not altered; the project remained the same. The deductive change order simply conformed the estimated quantities to the actual scope of the work.”

The court thus ruled that Mathy did not breach the subcontract, and it also upheld the trial court’s ruling that since Storms failed to present evidence of its fixed costs, nothing should be awarded.

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].

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